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Basic backtesting in Excel: issues

with data
by AdamHGrimes | Oct 27, 2015 | General Comments, Trading tools | 2 Comments

If you’ve been following along with the short Excel course, you’ve created a spreadsheet
using SPY daily data, and added daily TLT data to the sheet in another column. I received a
few questions about why we needed to match the two series with a VLOOKUP instead of
simply pasting the data into another column. Answering that question leads us to
considering some other issues about market data, so this is a good time to take a day or two
to think about those issues.

You might think this should be simple, and perhaps you’re right–markets trade, prices are
published, and we should be able to just look at those past prices and call it a day. In reality,
it’s a lot more complicated, and it’s not unusual to nd, for instance, academic researchers
spending the vast majority of their time dealing with data issues. (Some researchers
estimate that 85% of their time is spent on mundane data tasks.) Let’s look at some of those
issues so we can better understand what can go wrong when working with market data.

These errors fall into two categories. One we could call “problems” rather than errors
because no mistake has been made in the recording or transmission of the data. The other
category is these actual errors, and we should look at how to catch some of the more
common actual errors as well. The “problems” are instructive, so let’s start there.

Problems with data that are not errors

The most obvious reason we needed the VLOOKUP is that not everything trades every day.
For instance, if we were matching foreign currencies with a US-listed stock, the currency
will have traded many days that the US stock market was closed. If we were to simply paste
the data series together, we’d nd one has “missing dates” which were dates the exchange
was closed. VLOOKUP xes this problem, but makes us vulnerable to another.
Another, very serious, issue is asynchronous trading, which means that you may be looking
at datapoints that, while they bear the same time stamp, did not happen at the same time. A
good example on daily data might be Brent crude and WTI; if you’re using end of session
prices for both, they probably didn’t happen at the same time. How about US stocks and
European stocks? If you compare end of session quotes, the US stocks are probably from
16:00 EDT, while the European close was many hours earlier. If you create a trading
strategy based on a relationship, you won’t be able to execute one leg of the spread.

This is also a serious problem with intraday data, and particularly when mixing data from
many sources. Some bars are timestamped at the beginning of the bar, some at the end.
Which are yours? How about if you are comparing intraday data from an active stock and
from one that does not trade for many minutes? The active stock will show a price change,
while the less active stock will display the same price. Again, there’s a spread relationship
here that is only an illusion, as the bid ask spread for the less active stock will likely have
moved (and here’s your solution to that particular problem.)

Let’s not even get into the issues of back-adjusting data for futures rolls or stock corporate
actions. There are established methodologies for doing these things, and they work–but
they have to be done properly. (Also, too many naive technical analysts have no idea what
these issues are or what their charts actually show. The more I learned about these issues,
the less I trusted “levels” and many traditional chart formations.)

Actual data issues

Now let’s consider the actual issues, and they are legion. You might also think that paying
for data would x these problems, but you will nd issues even in data purchased from
commercial vendors. Some of the favorites to watch for:

Missing entries
Entries that display the same price (e.g., seeing a string of 5 minute bars in the ES futures
that show the same prices.)
H = L = C in an active market (not likely)
H < L or L > H. Some errors are obvious, but you have to look for them. This little gem is
not so easy to nd when you have 40,000 datapoints.
Missing or incorrectly placed decimals. The way to check for this is to look for very large
price changes. For instance, seeing a change of +/- 1000% in 1 minute bars would be,
shall we say, unlikely, and probably points to an error.
Volume or open interest data with errors.
Missing data points. (Example: a high price missing for a random bar. It happens.)

The list goes on, but you need to be aware of these issues and you need to have some way
to check for them. I’m not going to focus too much on data issues in this short series, but I
thought these serious issues–and they are serious because they can create completely
misleading tests and destroy a lot of your time work–I thought these issues deserved our
respect and some attention.

Tomorrow we will get into the fun stuff and start to do calculations with the data that we
now have in our spreadsheet.

2 Comments Market Musings 

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zaqimon .
− ⚑
3 years ago
There is another issue existing in daily data, which is the Close price might be in fact the
calculated daily Settlement price, not the actual Close price.
△ ▽ Reply

Adam Grimes > zaqimon .

3 years ago
− ⚑

Very true... must always understand what, exactly, your data is.
1△ ▽ Reply

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